Ashton J. Ryan Jr. participates in 2013 as president and CEO of First NBC Bank in its public trading debut on the Nasdaq Exchange. Ryan relinquished his title of CEO in December; the bank was ordered closed by regulators on Friday. It will be absorbed by Whitney Bank.

The decline and fall of First NBC Bank: What happened?

Ashton J. Ryan Jr. participates in 2013 as president and CEO of First NBC Bank in its public trading debut on the Nasdaq Exchange. Ryan relinquished his title of CEO in December; the bank was ordered closed by regulators on Friday. It will be absorbed by Whitney Bank.

The death knell comes less than two weeks after federal and state regulators — their concerns about First NBC's accounting practices and capital levels mounting — seized the beleaguered institution, ordering it closed and initiating a $1 billion cleanup, the costliest failure of an American bank since 2010.

The beleaguered First NBC Bank was abruptly ordered closed by state regulators Friday, and i…

"Relying on volatile funding sources, the bank has experienced rapid growth in assets that were not liquid," John Ducrest, commissioner of the Louisiana Office of Financial Institutions, said in a four-page affidavit outlining the reasons for the seizure.

The affidavit, filed in Orleans Parish Civil District Court on April 28, the day of the seizure, added that First NBC was "in an unsafe and unsound condition, and cannot any longer continue the business of banking."

Despite a tumultuous year for the New Orleans-based bank that saw its stock price tumble by 90 percent ahead of the closing, the sudden failure still caught many observers by surprise.

Ducrest's affidavit shows the situation deteriorated rapidly, with the bank taking heavy losses in recent months in its portfolio of loans and tax-credit investments, despite measures to shore up its finances.

In the end, the bank was insolvent. As of March 31, its so-called Tier 1 capital, a measure of a bank's financial strength, was roughly $72 million in the red.

After the seizure, First NBC Bank was acquired by Mississippi-based Hancock Holding Co., the parent company of Whitney Bank, in a deal that included $1.6 billion in deposits and $1 billion in assets, including $600 million in cash. The cost to the Federal Deposit Insurance Corp. — an arm of the government — was estimated at $1 billion.

Stark reversal

The bank's abrupt end marked a stark reversal of once-promising fortunes.

When First NBC was founded in 2006, it drew a who's who of backers, including Peyton and Eli Manning, the New Orleans-born star NFL quarterbacks, and set a Louisiana record for capital raised by a start-up bank.

First NBC was the creation of Ashton Ryan Jr., who chose a name that recalled First National Bank of Commerce, a prominent New Orleans bank that was acquired by Bank One in 1998.

As the new bank grew, so too did Ryan's celebrity, earning him status as the city's best-known banker, even though his bank was far from the biggest. He earned roughly $1.6 million in total compensation in 2015.

Over the years, he's been a regular presence within many of the city's civic groups, including the boards of Greater New Orleans Inc., the University of New Orleans Foundation and Junior Achievement of Greater New Orleans.

He's also been recognized for his civic contributions, including by the New Orleans Council for Community and Justice, which awarded Ryan its annual Weiss Award in 2014.

At the new bank's helm, Ryan played a central role in the city's business community as it recovered after Hurricane Katrina in 2005. He pursued an aggressive strategy, acquiring other banks, that led First NBC to grow quickly.

The stock peaked at nearly $42 a share in December 2015 and then began to tumble as questions arose about Ryan's management.

In its 2015 annual report, which was filed in August 2016, First NBC disclosed problems with its internal controls and accounting practices.

Among other things, the review found Ryan had a "dominant influence" at the bank, while the board failed to exercise "adequate oversight." It also disclosed that the FDIC had determined First NBC was no longer "well capitalized," a downgrade that came with new restrictions.

In December, Ryan was removed as CEO but remained as president of the bank and its parent company. He resigned altogether last month.

For much of 2016, First NBC Bank's parent company was behind on its financial reports.

By October, the company made several startling disclosures: that it was deemed in "troubled condition" by the Louisiana Office of Financial Institutions and the Federal Reserve Bank of Atlanta, and that the U.S. Securities and Exchange Commission was investigating its financial reporting.

Those ominous announcements appear to have sparked a run on deposits: From Oct. 24 to March 31, nearly $2.7 million in deposits were withdrawn on average each day, court records show.

Reached by phone last week, a combative Ryan blamed The Advocate's reporting at the time for the bank’s troubles, saying the news coverage sowed more unease than the bank's admissions themselves.

Asked about First NBC’s collapse, he said only, “I'm not going to talk about it,” adding that his role at the bank had "diminished substantially over the past six months.”

But he stressed that he didn't blame his successors for the bank's demise. "I'm not going to second-guess anything people did to save the bank," he said.

Whitney Bank’s acquisition of the failed First NBC Bank could lead to many branch closures i…

Accounting questions

Questions about the bank's accounting were raised more than a year ago.

In April 2016, the bank's parent company said it had found errors in its earlier reports regarding federal and state historic rehabilitation tax credits. After a review, First NBC said its financial statements for 2011 to 2014 should no longer be relied upon.

In November, the company entered into a consent order with federal and state regulators, who were to supervise a review of First NBC's management, loan portfolio, budget, strategic planning and its plans to boost its capital and liquidity.

To shore up its balance sheet, First NBC agreed in December to sell nine branches and $1.3 billion in loans to Hancock for $200 million.

Its next big move came in early February, when the company named Carl Chaney to serve as CEO.

A former head of Hancock Holding Co. who was at the helm when Hancock merged with Whitney Bank in 2011, Chaney has a track record of growing banks. Under his watch, the value of Hancock’s assets grew from $6 billion in 2006 to $21 billion in 2014.

Chaney's first assignment: "Find out how deep the hole is, and once that number was determined, then immediately go out and raise the appropriate equity," he said in a recent interview.

But auditors soon realized the bank's loan portfolio had problems.

First NBC had made large loans to a small number of borrowers — much riskier than making a large number of small loans, because the failure of just a few big loans can be devastating. The bank's 10 biggest loans averaged about $76 million, according to its 2015 financial filings, high for a bank of its size.

And as regulators conducted their review of the bank, the outlook on First NBC's loans grew worse: In September, for instance, it had recorded about $130.7 million in non-accruing construction and industrial loans; by December, that number had ballooned to $392.8 million, according to regulatory filings.

"As we dug deeper into the portfolio, it became obvious that the situation was much worse than maybe anyone had originally thought," Chaney said.

The ratio of First Bank's capital to its risk also grew worse. By March, the FDIC offered an ultimatum: raise new capital or sell the bank.

Chaney figured he needed to raise about $450 million in cash to shore up the bank's finances.

He lined up more than $200 million, he said, and had more meetings scheduled. But it was complicated. Regulators wanted the money in hand, but potential investors first wanted to see the bank's audited financial reports, which were weeks away from being completed.

Meanwhile, a deadline loomed.

For months, First NBC had been saying it planned to submit past-due 2016 financial statements by April 30. It was also required to file a call report, which must be submitted within 30 days of the end of a quarter and is used by industry regulators to monitor the condition and risk profile of individual banks.

Regulators knew the report would show the bank was insolvent.

Starting April 7, the FDIC began a two-week effort to find a potential buyer. The process drew two offers, although only one of them — Whitney's — was judged responsive.

On April 28, a Friday, at 9:15 a.m., ad hoc Civil District Judge Donald Johnson signed an order placing the bank under Ducrest's control, a move that had to be authorized by Gov. John Bel Edwards.

The FDIC was immediately named the bank's receiver, and it transferred all checking, savings and money-market accounts to Whitney.

"We simply ran out of time," Chaney said. "It's very unfortunate, but I do understand."

First NBC's board received the news that morning.

"It was a difficult board meeting. No one likes to hear that," Chaney said. "No one likes to receive that message, and even though I'd only been there two months, it was a hard message to receive."

Tax credit woes

First NBC Bank was a big player in many ambitious post-Katrina projects financed with federal and state tax credits, but the bank's heavy reliance on the business concerned industry analysts.

By most accounts, the bank’s tax-credit business worked on two levels: First, the bank would loan money to developers for projects that relied on the tax credits. Second, it would invest in projects that used the credits, including New Market Tax Credits and those for low-income housing or historic rehabilitation.

Among dozens of projects it aided, prominent examples included the National World War II Museum, Treme's historic Carver Theater and the Saint Hotel on Canal Street.

In turn, the company recorded the credits' benefit on its balance sheet as expected cash flow from future tax benefits, essentially profit, and they ultimately accounted for much of its earnings in recent years.

But to use the credits, the bank needed to actually earn a profit on which to pay taxes. Since that wasn’t happening, the credits began to pile up into what's called a deferred tax credit. As that figure grew on the bank's balance sheet, banking experts noticed something was amiss.

HoldCo Asset Management, a New York investment adviser that advertises targeting "complex and often misunderstood situations," began questioning First NBC's approach last summer, and it issued critical public letters to the bank's management.

"We don't think any research analyst who covers your stock truly understands this tax business, its accounting treatment, its regulatory treatment or its economic value," the firm said in an Aug. 12 letter, which also suggested the bank needed to raise at least $300 million to improve its capital level.

HoldCo had more than a passive interest: The firm owned the bank's debt before later betting against its stock, meaning that it would profit if shares continued to fall in value.

First NBC denied HoldCo's assertions at the time, dismissing them as "nothing but a cheap attempt to put FNBC into bankruptcy in order to acquire the company on the cheap."

By the time he came on board, Chaney had decided not to continue the practice of both investing in tax-credit projects and lending them money, which he saw as "too risky."

"Making loans to appropriate developers related to tax credit projects, those can be done very profitably," he said. "If you go the next step and actually make investments into the tax credit entities, that's where I think you've gone way too far."

By late 2016, the bank's expected future tax offsets from the credits totaled nearly $315 million. Many observers questioned how the bank would be able to use the credits, which would eventually expire worthless.

Tax credits are "wonderful if you're making money, but they're not so wonderful if you're not making money," said Sherwood "Woody" Briggs, a longtime New Orleans banking analyst at Chaffe & Associates. "If you're not making money, you're not paying taxes, and if you're not paying taxes, what good are they?"

But it ultimately wasn't the much-maligned tax credit business that took First NBC under, records show.

Many banking analysts believed the bank's December deal with Whitney had given it enough breathing room with the FDIC. But the downside was that Whitney had acquired the bank's better-performing assets.

In his affidavit, Ducrest outlined a trio of recent hits to the bank's bottom line that served as the final blows.

Those included a $45 million write-down of First NBC's tax credit business, which was recorded March 24, essentially an admission that the money likely wasn't coming in.

Next came a $201 million adjustment to cover potential loan losses, which was recorded April 10.

Third, because the losses were mounting, they diminished the value of First NBC's deferred tax asset by an estimated $400 million, since the company was unlikely to generate enough taxable income in the future to take advantage of the asset.

"Without an immediate, significant injection of capital, the bank is not viable," Ducrest's affidavit said.

Faced with those facts, by 4 p.m. on April 28, Johnson signed a separate order to close and liquidate the bank.

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